Their earth moving business had finally started to build up some momentum and they had won a large contract to landscape a series of new housing estates. Energetically, the directors leased four new excavators and put on half a dozen extra staff in order to meet the contract's strict deadlines and then got to work.
Two months' in and their Project Manager realised that they had got a key measurement wrong and 400 metres of concrete footpaths had been laid incorrectly. 3 weeks work had to be torn up and done all over again. The staff worked overtime to catch up and had made good in just two weeks, but by then they had missed the progress milestone laid out in the contract and their payment was deferred for 8 weeks.
The Project Manager quickly managed to return the job to the agreed schedule, but by then they were five months' in and had not received a cent from the developer. Their next equipment lease payment of $250,000 was due in one week, but they had maxed out their facility with the bank on their previous 3 months' lease payments and wages and the cash from the developer was not available for another 25 days! They couldn't pay their bills.
Their equipment leasing company was well-know for being trigger happy with their repossessions. The directors were worried and didn't have means to tip in the required funding. Their backs were to the wall and several days passed before they accepted the difficulty of their position and took action. The director called an Insolvency professional and asked what could be done....and within 48 hrs the business was safely trading under Voluntary Administration.
The story finished happily. The Voluntary Administration enabled the business to keep trading, ensured their equipment could not be repossessed and the project would not be interrupted. The workers were also still embarrassed at their earlier mistake and doubled their efforts causing the project to be finished ahead of time. It was a milestone in the continued growth of the company and a foundational business lesson for the directors about the critical difference between profitability and cash flow.
How can a Voluntary Administration help you?
As we saw in our story a company can be trading profitably and yet still become insolvent. In the presence of more generous creditors a business can often be traded out of temporary cash flow problems without external assistance. However, if this cannot be achieved, Voluntary Administration provides a framework for a company and its creditors to negotiate a compromise, whilst protecting the key stakeholders.
Voluntary Administration addresses the critical needs of stakeholders in three important ways:
Removes Creditor Pressure:
Allowing the business to focus on trading, rather than juggling the competing demands of creditors;
Protects the Assets and Operations:
Assets are placed under the supervision of an independent person, the administrator.
Provides a Statutory Framework for Negotiations with Creditors:Enabling an acceptable compromise to be brokered by the Administrator on behalf of all stakeholders.
Initiating a Voluntary Administration
A voluntary administration can be quickly implemented by a resolution of the directors. It is designed to keep a business together until the administrator has had the opportunity to assess its financial position and prepare a report. To facilitate this process, recovery action by creditors is usually frozen whilst a compromise is negotiated.
The outcome of these negotiations are documented by the administrator into a binding agreement called a ‘deed of company arrangement’. The deed is an agreed 'plan of action' for the company and its creditors. It is administered by a deed administrator who is usually the person that previously acted as administrator. Although legislation sets out certain matters that must be dealt with in the deed, there is great flexibility and they can be tailored specifically to the requirements of both the creditors and the business.
Examples of deed clauses may be:
An immediate one-off payment to creditors in full and final settlement of their claims.
An immediate payment to creditors, with the possibility of a further payment to be made from the proceeds of a successful litigation.
A series of payments to be made from the profits of ongoing trading for a specified period, conducted under the supervision of the deed administrator.
If you can foresee cash flow problems in your own, or one of your clients’, business then please don’t delay in getting in touch with us. The best outcomes are always achieved when action is taken early.
Call Bruce Mulvaney now on (03) 9896 9000 and arrange an initial no cost, no obligation consultation.